What Happens to the Family Business in a Divorce?

Divorce involving a family business blogMany people would rather open their own restaurant, salon, or other type of business rather than work for an employer. That’s why many spouses choose to form a family owned business, or a business in which two or more family members have control or majority ownership. However, if the spouses divorce, having a family owned business can make the divorce more complicated. Struggles with the business can often be an impetus for divorce, but plenty of couples divorce while the business is performing well. 

Does it matter if the business was acquired during the marriage?

This depends on whether you live in a community property or an equitable division state. Arizona is a community property state. In Arizona and other community property states, assets and debts the spouses acquired during the marriage will be split evenly if they divorce. The spouses can agree to a division other than community property, but the court will use those principles if the spouses are unable to reach an agreement. 

A business that is given to one spouse through gift or inheritance from another family member may be considered separate property, despite the transfer occurring during the marriage. 

What if one spouse owned the business prior to marriage?

Even if one spouse owned the business prior to the marriage, the other spouse may have some claim to the business due to an increase in value in a community property state. The other spouse may also have contributed their own efforts and separate property to the business. You should talk to a family law attorney in your area to determine if your business has become commingled with other community assets. Just because a separate asset becomes commingled doesn’t mean that it will be split down the middle, 50/50, like other community assets. The spouses may be assigned a pro rata share based on the other spouse’s contributions, the value of the business before the marriage, etc. 

What if the Family Business has debt?

divorce and family business blogIf the family business has debt, those debts will be deducted from the total value of the company. The spouses may want to consider selling or closing the business if it hasn’t been profitable for a while. The couple may also want to consider bankruptcy and consult with attorneys on which order would be best to file.  Our office offers bankruptcy services as well and may be able to assist you if that is the avenue that you may want to pursue. Regardless of your decision, it should not be made hastily. Slow down, evaluate the facts, consult with an attorney or seasoned business evaluator and arrive at a sensible solution.

Valuing the Family Business.

Unless the business is being shut down permanently, it is vital to accurately value the business for property division purposes. The spouses should consider hiring a business evaluator or a forensic accountant to help determine the value of the business. These professionals will review documents like tax returns, financial reports, and profit and loss statements to assign a value to the company.The business may also be compared to similar companies in the area for an approximate value range. Some methods focus more on assets versus liabilities, while others center solely on the actual profit derived from the business. Some jurisdictions place a financial value on a good reputation, and others don’t. 

If you believe your family business has significant value, you will most likely need an expert family law attorney to assist in the business valuation process, as well as all other divorce negotiations. It may be necessary to hire expert witnesses for testimony to determine your company’s value. Once the judge agrees to a valuation, the spouses can proceed with their selection of what to do with the business. 

What are the options in settling the family business ownership and assets?

There are limited options in how to deal with a family business during a divorce.

These include: 

  • One spouse buying out the other: The business will be valued along with the rest of the spouse’s marital property. The spouse who keeps the business may give the other spouse the value of their share, or that spouse will receive the equivalent value in other assets like vehicles and houses. 
  • Continue to run the business as co-owners: This option is only feasible if the couple remains amicable. The spouses will need to draft a detailed business plan on how responsibilities will be delegated, how profits will be split, etc. 
  • Sell the Business: The couple will sell the business and split the proceeds, and continue with property division as usual. 
  • Shut down the Business: This is the last resort if the couple is unable to reach an agreement, if all the other methods of splitting the business are implausible, or if the business was underperforming before the divorce. 

Do you own a family business but are thinking about filing for divorce?

You don’t have to make this decision alone. You should not make this decision without contacting the experienced Divorce Attorneys from My Arizona Lawyers. We offer free consultations and have a variety of payment plans that will work within a budget. Therefore, to learn about your rights, options, and projected outcomes, call (480) 263-1699 for a free consultation with one of our experienced family law lawyers. Our attorneys are driven to achieve the best possible results for our clients, and do so at competitive rates. Additionally. you may qualify for payment plan options- call to find out with your free consultation today!